IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH : B : NEW DELHI
BEFORE SHRI B.R. MITTAL, JUDICIAL MEMBER
AND
SHRI B.R. JAIN, ACCOUNTANT MEMBER
ITA No.2067/Del/2011
Assessment Year : 2005-06
DCIT, Vs. Cargo Motors Pvt. Ltd.,
Circle 3(1), 1/9-B, Jindal House,
New Delhi. Asaf Ali Road,
New Delhi.
PAN : AAACC2744C
CO No.172/Del/2011
(ITA No.2067/Del/2011)
Assessment Year : 2005-06
Cargo Motors Pvt. Ltd., Vs. DCIT,
1/9-B, Jindal House, Circle 3(1),
Asaf Ali Road, New Delhi.
New Delhi.
PAN : AAACC2744C
(Appellant) (Respondent)
Assessee by : Shri Ashok Khandelwal, CA
Revenue by : Shri Deepak Sehgal, Sr.DR
ORDER
PER B.R. JAIN, ACCOUNTANT MEMBER
This appeal by revenue and the Cross Objection by the assessee
arise from the order dated 22.02.2011 passed by Ld. CIT (A)-IV, New
Delhi, raise the following grounds:-
"1. The Ld. CIT (A) has erred on the facts and in law in
annulling the order u/s 143 (3)/147 of the IT Act while holding
invalid the reopening u/s 147, ignoring that also as per decision
2 ITA No.2067/Del/2011
CO No.172/Del/2011
of Hon'ble Supreme Court in CIT (A) vs. P.V.S. Beadies Private
Limited 237 ITR 13, the factual information provided by the
internal auditor is to be treated as information for the purpose of
reopening of assessment. Reliance is also placed on the
following decisions:
i) Bawa Abhai Singh vs. DCIT 253 ITR 83 (Del)
ii) Phoolchand Bajrang Lal vs. CIT (1993) 203 ITR 456 (SC)
iii) Ram Prasad vs. ITO (1995) 82 Taxman 199 (All)
iv) Consolidated Photo & Finvest Limited vs. ACIT (2006) 281
ITR 394 (Del)
v) KLM Royal Dutch Airlines vs. ADIT (2007) 292 ITR 49 (Del)
vi) ACIT vs. Rajesh Jhaveri Stock Brokers Pvt. Ltd. (2007) 161
Taxman 316 (SC)
vii) Praful Chunilal Patel vs. Makwana ACIT (1999) 263 ITR
832"
1.1. Grounds of Cross Objection read as under:-
"1. That on the facts and circumstances of the case, the loss
incurred on sale of vehicle amounting to Rs.6538841/- in the
normal course of the business is an allowable deduction and the
loss is not being capital in nature.
2. That similar claim has been allowed in the past and
subsequent years by treating the same as business loss and not
being capital in nature. That consistency is required to be
followed in the matter of assessment."
1.2. In the cross Objections, the assessee has also raised an
additional ground as follows:-
"That on the facts and circumstances of the case, the reopening
of the assessment is bad in law."
2. The assessee is a dealer of Telco and is engaged in buying and
selling of vehicles. A return of income at ` 4,09,20,360/- was filed. The
returned income was processed u/s 143(1) of the Act on 21.02.2005.
Thereafter, after recording the reasons, the Assessing Officer issued
notice u/s 148 of the Act on 20.12.2007. The assessee filed objections
for taking action u/s 148 through the letter dated 04.11.2008. The ld.
assessing authority, however, did not accept the contention of the
3 ITA No.2067/Del/2011
CO No.172/Del/2011
assessee and completed the assessment at an income of `
4,74,59,201/- after disallowing the loss claimed on repossessed assets
in terms of detailed discussions contained in the assessment order.
3. The Ld. CIT (A) considered the action to be vitiated as the action
was taken on the basis of objection on a legal issue raised by the audit
party; the Assessing Officer had reopened the assessment on the
written instructions of the territorial Commissioner of Income-tax; and
the communication by the audit cannot be taken as an information u/s
147 of the Act; and, thus, the Assessing Officer did not have any
reason to believe to reopen the assessment. He, however, did not
render decision on the merits of the addition so made by the assessing
authority as the notice was treated as void and assessment stood
allowed.
4. The Ld. DR, assailing the impugned order contends that the Ld.
CIT (A) has erred in treating the intimation/internal correspondence
resting between the Assessing Officer and the CIT as a direction. The
initial letter written by the assessing authority dated 17.12.2007 (copy
at assessee's paper book page 18), shall reveal that the Assessing
Officer himself has suggested two recourses for taking action in a case
like this. The reason also do not suggest that the action has been
taken on any directions as stated by the Ld. CIT (A). Secondly, in the
year under consideration no opinion has been formed by the Assessing
Officer as the return filed by the respondent stood accepted in a
summary manner. It was, therefore, within the competence of the
Assessing Officer to take action once he had bona fidely formed a
prima facie opinion that income of the assessee has escaped
assessment.
4 ITA No.2067/Del/2011
CO No.172/Del/2011
5. The Ld. CIT (A) also has misdirected himself in holding that the
observation of the audit party did not constitute information for taking
action u/s 147 of the Act. In fact, after the amendment of Section 147
there is no such requirement that there should be some information in
possession of assessing authority forming opinion. The only
requirement is that there should be tangible material to form prima
facie belief which, in the present case, the Assessing Officer had on
record itself and also stood revealed from the reasons recorded. The
decision taken by Ld. CIT (A), therefore, needs to be set aside by
allowing ground in appeal raised by the revenue.
6. On the other hand, the ld. counsel for the assessee, supporting
the conclusion reached by the Ld. CIT (A), states that keeping in view
the nature of business and the fact that in the earlier assessments it is
discernible that loss on sale of repossessed vehicles is a
commercial/business loss of the assessee. The issue also stood
examined in the assessment for Assessment Year 2001-02 where
similar audit objections were also considered in the light of the
judgement rendered by Hon'ble Allahabad High Court in the case of
Motor General Sales Pvt. Ltd. vs. CIT, 226 ITR 137 (All). The Assessing
Officer himself has disputed the audit objection and, therefore, the
same cannot be used to form reason to believe that income has
escaped assessment. Reliance has been placed on the judgement of
Hon'ble Gujarat High Court in the case of Cadila Healthcare Ltd. vs.
ACIT (2012) 64 DTR 344. Reliance has also been placed on the
judgement of the Hon'ble Delhi High Court in the case of CIT vs. SPL's
Siddhartha Ltd., order dated 14.09.2011 in ITA No. 836/2011 where it
was held that satisfaction of one authority cannot be substituted by the
satisfaction of the other authority. In the present case in appeal, the
Assessing Officer proceeded to take action on the basis of instructions
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CO No.172/Del/2011
from the higher authority, i.e., his territorial Commissioner of Income-
tax. Reliance has also been placed on:
i) Maruti Civil Works v. ITO (2011) 51 DTR 257 (Pune Tribunal)
ii) H.V. Transmissions Ltd. vs. The ITO (ITAT Mumbai), ITA
No.2230/Mum/2010, order dated 7th October, 2011.
iii) CIT-III vs. SFIL Stock Broking Ltd., 2010-TIOL-328-HC-DEL-IT
iv) DCIT vs. Duratex Export (ITAT, Mumbai, ITA
Nos.3088&3089/Mum/2010, order dated 15th June, 2011.)
v) ITO vs. M/s Dutta Construction (ITAT, Ahmedabad, ITA NO.
2013/Ahd/2008, Order dated 2.01.2011.
vi) DCIT vs. Citicorp Maruti Finance Ltd. (ITAT, Delhi, ITA
No.5515/Del/2010, Order dated 14.09.2012)
vii) Hotel Oasis (Surat) Pvt. Ltd. vs. DCIT (Judgement of the
Hon'ble Gujarat High Court in Spl. Civil Appln. No.10657 of
2009, dated 05.05.2011)
viii) Cadila Healthcare Ltd. vs. ACIT (2012) 64 DTR 344 (Guj)
7. We have heard the parties with reference to the material on
record and case laws brought to our notice. The Assessing Officer
recorded the following reasons before initiating action u/s 147 of the
Act and issued notice thereafter on 20.12.2007:-
"Reasons for initiating proceedings u/s 147 in the case of M/s
Cargo Motors Pvt. Ltd. for Assessment Year 2005-06.
The brief facts of the case are that the assessee company
filed its return of income on 31.10.2005 declaring income of
Rs.40920360/-. The same was processed u/s 143 (1) of the IT
Act on 21.3.2005 by accepting the returned income. The audit
party raised the following audit objection during the course of
audit:-
Section 37(1) of the Income Tax Act, 1961, provides that
any expenditure, not being expenditure of capital nature, laid
out wholly or exclusively for the purpose of business is
6 ITA No.2067/Del/2011
CO No.172/Del/2011
allowable as deduction in computation of the income chargeable
under the head "Profit and gains of business or profession." The
expenditure which is not related to the business is not allowable
as deduction. The assessment of M/s Cargo Motors Pvt. Ltd. for
the assessment year 2005-06 was completed after summary
manner in 2006 determining an income of Rs.40920360/-. Audit
scrutiny revealed that the assessee had debited Rs.6538841 to
the profit and loss account (in schedule 17) on account of "Loss
on sale of Repossessed Assets." This loss being capital in
nature, should have been disallowed and added back to the
income of the assessee. The omission resulted in
underassessment of income of Rs.6538841/- involving short levy
of tax of Rs.2392725.00
Ongoing through the audit objection, it is found that there
is substance in the issue raised by the audit. The loss on sale of
repossessed assets is not allowable as trading loss in this case
as held by the Honble Allahabad High Court in the case of Motor
and General Sales (Pvt.) Ltd. vs. CIT (226 ITR 137). The facts of
the case are also similar and in both the cases the vehicles are
not registered in the name of respective assessee. This was the
basis on which the court gave the ruling in favour of the
revenue. Thus the information provided by the audit has
material substance within the meaning of section 147 and the
same is invokable.
Further, in case of Ranchi Club v. CIT in 214 ITR 643, 1995
(Pat), the honourable court has held that in cases where only
summary assessment has been made and intimation sent to the
assessee u/s 143 (1), reopening u/s 147 is valid with issue of
notice u/s 148.
Here it is also pertinent to state that in its ruling by the
Hon'ble Apex Court in case of ACIT vs. Rajesh Jhaveri Stock
Brokers Pvt. Ltd. ( 291 ITR 500, 2007, SC) the reopening on the
basis of the revenue audit party objection was held to be valid.
Further, it has been held in Nagrath Chemicals Works vs.
CIT 265 ITR 401 (2004, All), that if the audit points out certain
facts which were not in the knowledge of the Income-tax Officer
when he made the original assessment, it would constitute
information under section 147 (b) of the Income Tax Act, 1961.
Similar views have been held in following case laws ­
Zoraster and Co. vs. CIT [1978] 163 ITR 858 (Raj); Labella
Construction Co. vs. CIT [1994] 207 ITR 657 (Guj); R. Madhavan
Nair v. CIT [1976] 105 ITR 813 (Ker.); Claridges Hotel P. Ltd. vs.
ITO [1980] 123 ITR 844 (Delhi).
Further in Bawa Abhai Singh vs. DCIT (2001) 168 CTR
(Delhi) 521/253 ITR 83,Arijit Pasayat, CJ it was held that the only
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condition for action is that A.O should have reason to believe
that income ahs escaped asst. which belief can be reached in
any manner and is not qualified by a precondition of faith and
true disclosure of material fact by the assessee as contemplated
in the pre-amended section 147 (a).
A.O. can under the amended provision legitimately reopen
the asst. in respect of an income which has escaped asstt.
Viewed in that angle power to reopen asstt. Is much wider under
the amended provision and can be exercised even after
assessee has disclosed fully and truly all the material facts, so
similar view were the conclusion of this Court (Delhi) in 142 CTE
(Delhi) 271, 225 ITR 496.
In view of above facts of the case and the provisions of
the act in this regard and the case law cited above, I have
reasons to believe that the income to the tune of Rs.6538841/-
has escaped assessment. Therefore, notice u/s 148 is hereby
issued for reopening u/s 147 of the IT Act.
Sd/-
(Dr. Prashant Khambra)
Asstt. Commissioner of Income Tax
Circle 3 (1), New Delhi."
8. The correspondence resting between the Assessing Officer and
his territorial Commissioner as well as replies to audit objections have
also been perused. Firstly, the reasons recorded do not reveal that the
action has been taken on the direction of his superior authority. The
judgement rendered by the Hon'ble Delhi High Court in the case of CIT
vs. SPL's Siddhartha Ltd. (supra), therefore, cannot be applied to
peculiar facts of this case. We, therefore, do not agree with the Ld. CIT
(A) that the assessment has been reopened on the instructions of ld.
CIT.
9. As regards the assessee's belief that the Assessing Officer has
disputed the objections and, as such, he cannot use the audit report
for initiating action u/s 147 of the Act, we find that the issue has to be
examined in the light of the judgement of the Apex Court in the case of
Rajesh Jhaveri Stock Brokers Pvt. Ltd. (supra). According to the
8 ITA No.2067/Del/2011
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aforesaid judgement, relevant consideration for assumption of
jurisdiction is that the Assessing Officer must form a prima facie belief
based on material on record that income of the assessee has escaped
assessment. This prima facie opinion must be based on material on
record and should not be mere pretence or reason to suspect. The
material on record reveals that in the case of the appellant himself
proceedings for re-assessment had also been initiated for Assessment
Year 2001-02 in respect of identical claim of loss on sale of
repossessed assets. The proceedings for re-assessment for
Assessment Year 2001-02 though had commenced on 7th February,
2008, which is subsequent to the impugned notice, but the same were
also based on an audit objection as is the case of the appellant in the
year under consideration. In respect of replies furnished by the
Assessing Officer for Assessment Year 2001-02 in response to audit
objections, it was stated that the loss on sale of repossessed assets is
a revenue loss. This is evident from the letter dated 22.11.2006
written by Ld. DCIT, Circle 3 (1), copy of which is laid at pages 56-57 of
the assessee's paper book. It has been stated therein as under:-
"After considering the above submissions made by the assessee,
such loss which is normal in the nature of business carried on by
the assessee was allowed as deduction. Such loss incurred is
being allowed year after year whenever the same was incurred.
This being the normal business loss incurred for carrying on the
business cannot be treated as capital loss. No capital asset was
acquired. Therefore, there was no omission on the part of the
A.O. on the above said issue. Considering the commercial loss
due to change in the market scenario explained by the assessee
in detailed and facts of the case, observation made by the
Revenue audit party is not accepted."
10. Further, in the letter dated 6/8.1.2007 by ACIT, Circle 3 (1), it
was reiterated that loss on sale of repossessed assets is a normal
business loss and not a capital loss. It was stated therein as under:-
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"As seen from above, the loss on account of sale of repossessed
vehicles is a normal business loss in the nature of business carried on
by the assessee. Hence, this was allowed as a revenue loss and
cannot be treated as capital loss. Hence, there was no omission on part
of the A.O. during the asstt. Proceedings for allowing this deduction.
Still your kind directions are solicited on the above mention issue
raised by the revenue audits for the possible remedial action."
11. It maybe pertinent to state here that the aforesaid letter dated
08.11.2007 was written by the same Assessing Officer who has
recorded the reasons for the year under consideration and issued the
impugned notice u/s 148 of the Act. Likewise, the aforesaid facts were
reiterated in another letter dated 28.11.2007 which was also before
initiating the action u/s 148 of the Act in the impugned year. Thus, the
fact which emerges from the aforesaid letters is that the Assessing
Officer himself has entertained a belief that the loss on sale of
repossessed assets in the case of the assessee is a business loss and
not a capital loss. Moreover, it is pertinent to state here that despite
above replies, action u/s 148 was initiated for Assessment Year 2001-
02 and an order dated 16.12.2008 was made. The aforesaid order was
annulled by the Ld. CIT (A) and the Appellate Tribunal confirmed the
action vide its order dated 13.11.2009. Since, in the business of the
assessee loss has been treated as a business loss, therefore, it does
not stand to any reason that it could be a capital loss in the impugned
year particularly when no change in business activity is shown to have
undergone in the year under consideration.
12. Under the peculiar facts and considering the history of the
assessee itself as well as the replies and reasoning taken by the
Assessing Officer himself while dealing with the audit objections, it
cannot be said that there was any tangible material in the possession
of the Assessing Officer for forming opinion that the expenditure/loss
10 ITA No.2067/Del/2011
CO No.172/Del/2011
under consideration could be capital loss and not business loss
requiring him to initiate action u/s 147 of the Act.
13. That apart, since the Assessing Officer himself has disputed the
objection in Assessment Year 2001-02, which is identical to the audit
objection for the year under consideration, the same cannot constitute
reason to believe as has been held by Hon'ble Gujarat High Court in
the case of Cadila Healthcare Ltd. vs. ACIT (supra). We, therefore,
concur with the conclusion of the Ld. CIT (A) and find no reason to
interfere therein for our own reasons stated hereinbefore and reject
the grounds raised in appeal by the revenue.
14. Having confirmed the conclusion reached by the Ld. CIT (A),
whereby the notice of assessment stood quashed, we do not consider
it necessary to decide the merits of the grounds raised in assessee's
Cross Objections as necessary consequence shall follow in the light of
judgement rendered by the Hon'ble Calcutta High Court in the case
Rawatmal Harakchand vs. CIT 129 ITR 346 (Cal)
15. In the result, the appeal by the revenue is dismissed and the
Cross Objections by the assessee becomes infructuous. The same
stand disposed of accordingly.
The order pronounced in the open court on 02.11.2012.
Sd/- Sd/-
[B.R. MITTAL] [B.R. JAIN]
JUDICIAL MEMBER ACCOUNTANT MEMBER
Dated, 02.11.2012.
dk
11 ITA No.2067/Del/2011
CO No.172/Del/2011
Copy forwarded to: -
1. Appellant
2. Respondent
3. CIT
4. CIT(A)
5. DR, ITAT
TRUE COPY
By Order,
Deputy Registrar,
ITAT, Delhi Benches